An official at Stadshypotek told The Covered Bond Report that the end result of a Eu1bn long five year benchmark on Tuesday was satisfactory, even though pricing had to be widened after the issuer was ill-advised by a range of banks, and he said that a lesson had been learned.

Bengt Edholm

In a rare move the leads on the Swedish issuer’s deal – Danske, Deutsche Bank, SG and Svenska Handelsbanken – set guidance considerably wider than where initial price thoughts had been set. In response to investor pushback they moved from the high-single digits over mid-swaps area to guidance of the 15bp over area.

A Eu1bn deal was eventually priced at 14bp over on the back of around Eu1.7bn of orders, after around Eu600m of orders had come in on the basis of the high single-digits.

The transaction is Stadshypotek’s first euro benchmark covered bond in almost exactly a year, and Bengt Edholm, head of treasury at Svenska Handelsbanken, Stadshypotek’s parent, said that it was prompted by the observation early this week that the issuer might be able to print a deal in the high single-digits and thereby, for the first time, fund itself more cheaply in euros than in Swedish kronor.

The issuer followed up on this with investment banks as part of its regular conversations with them, added Edholm, and they advised Stadshypotek that it could print a deal without a new issue premium.

“This was the advice we got from a range of banks, not just the leads,” he said. “Most of the banks advised us that we could print inside 10bp over.”

With Stadshypotek euro covered bonds trading at around 7bp-8bp over in five years this pointed to a level of around 9bp over for a long five year, added Edholm.

However, when the issuer launched its deal on Tuesday there was competing supply, such as in the form of a new cédulas hipotecarias issue from CaixaBank, and this and other deals “took away the limelight from our very low risk offering”, said Edholm.

As a result of only moderate demand coming in the issuer had to make a decision as to how to proceed with the transaction.

“We could have decided to print a Eu500m deal,” said Edholm, “but we’ve never done that before and because we got the message that the problem was not our credit but the spread the decision was obvious.

“We decided to increase the spread and then the order books exploded in five minutes.”

The eventual outcome of the transaction was satisfactory, even though the initial spread was a mistake in being too tight, he said.

“In the end the new issue premium is 4bp, which is what we have paid in the past, and the all-in euro funding cost is 7bp wide of domestic levels, which is also in line,” said Edholm. “The deal has also performed so we do not think the way it ended up will impede future transactions.

“It is a lesson, and it appears we were ill-advised and that the banks misread the market,” he added. “The consensus was that we could print inside 10bp over, but the conclusion we have drawn is that as long as the market is in risk-on mode as one of the safer credits you have to pay a new issue premium.”

A syndicate banker away from the leads echoed this, saying that even though investors are cash rich issuers and their leads would be well advised to be more investor friendly with yields having fallen after the inconclusive Italian elections and with spreads at historic lows.

“The incident showed that new issue premiums will have to rise in core markets and that pricing power is still in investors’ hands” he said. “Low beta names are now under pressure and the pricing paradigm for Nordics is now likely to change since other Nordic banks will surely be scared of experiencing the same result and be less aggressive on pricing.

“Yesterday’s session also emphasised that the primary market remains wide open but the right pricing approach and IPTs remain decisive. Demand for new issues is driven by the lack of supply, but investors are price sensitive and concerned by the spread situation in some jurisdictions, namely Germany and Nordic countries where spreads are tight in a global context of spread convergence.”